Multiple Choice Questions
1. Managerial accountants:
A. rarely become involved in an organization's
decision-making activities.
B. make decisions that focus solely on an
organization's accounting matters.
C. collect data and provide information so that
decisions can be made.
D. often serve as a cross-functional team
member, making a wide range of decisions.
E. become involved in activities "C"
and "D."
Answer:
E LO: 1 Type: RC
2. Factors in a decision problem that cannot
be expressed in numerical terms are:
A. qualitative in nature.
B. quantitative in nature.
C. predictive in nature.
D. sensitive in nature.
E. uncertain in nature.
Answer:
A LO: 2 Type: RC
3. At which step or steps in the decision-making
process do qualitative considerations generally have the greatest impact?
A. Specifying the criterion and identifying the
alternatives.
B. Developing a decision model.
C. Collecting the data.
D. Making a decision.
E. Identifying the alternatives.
Answer:
D LO: 2 Type: RC
4. An accounting information system should be
designed to provide information that is useful.
To be useful the information must be:
A. qualitative rather than quantitative.
B. unique and unavailable through other sources.
C. historical in nature and not purport to
predict the future.
D. marginal between two alternatives.
E. relevant, accurate, and timely.
Answer:
E LO: 2 Type: RC
5. To be useful in decision making, information
should possess which of the following characteristics?
|
|
Relevance
|
Accuracy
|
Timeliness
|
||
|
A.
|
Yes
|
|
No
|
|
Yes
|
|
B.
|
Yes
|
|
Yes
|
|
No
|
|
C.
|
Yes
|
|
Yes
|
|
Yes
|
|
D.
|
No
|
|
Yes
|
|
Yes
|
|
E.
|
No
|
|
No
|
|
Yes
|
Answer:
C LO: 2 Type: RC
6. A trade-off in a decision situation sometimes
occurs between information:
A. accuracy and relevance.
B. relevance and uniqueness.
C. accuracy and timeliness.
D. sensitivity and accuracy.
E. sensitivity and relevance.
Answer:
C LO: 2 Type: RC
7. Which of the following best defines the
concept of a relevant cost?
A. A past cost that is the same among
alternatives.
B. A past cost that differs among alternatives.
C. A future cost that is the same among
alternatives.
D. A future cost that differs among
alternatives.
E. A cost that is based on past experience.
Answer:
D LO: 3 Type: RC
8. Consider the following costs and
decision-making situations:
I.
The
cost of existing inventory, in a keep vs. disposal decision.
II.
The
cost of special electrical wiring, in an equipment acquisition decision.
III.
The
salary of a supervisor who will be transferred elsewhere in the organization,
in a department-closure decision.
Which
of the above costs is (are) relevant to the decision situation noted?
A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.
Answer:
B LO: 3 Type: N
9. The following costs are relevant to the
decision situation cited except:
A. the cost of hiring a full-time staff
attorney, in a decision to establish an in-house legal department or retain the
services of a prominent law firm.
B. the remodeling cost of existing office space,
in a firm's decision to stay at its current location or move to a new building.
C. the long-term salary costs demanded by Joe
Torrez (a superstar) and Rip Moran (an average player) in baseball contract
negotiations, in a decision that determines the amounts by which ticket prices
must be raised.
D. the cost to enhance an airline's Web site, in
a decision to expand existing service to either Salt Lake City or Phoenix.
E. the commissions that could be earned by a
salesperson, in a decision that involves salesperson compensation methods
(i.e., commissions or flat monthly salaries).
Answer:
D LO: 3 Type: N
10. Which of the following costs can be ignored
when making a decision?
A. Opportunity costs.
B. Differential costs.
C. Sunk costs.
D. Relevant costs.
E. All future costs.
Answer:
C LO: 4 Type: RC
11. The book value of equipment currently owned
by a firm is an example of a(n):
A. future cost.
B. differential cost.
C. comparative cost.
D. opportunity cost.
E. sunk cost.
Answer:
E LO: 4 Type: RC
12. The cost of inventory currently owned by a
firm is an example of a(n):
A. opportunity cost.
B. sunk cost.
C. relevant cost.
D. differential cost.
E. future cost.
Answer:
B LO: 4 Type: RC
13. The City of Miami is about to replace an old
fire truck with a new vehicle in an effort to save maintenance and other
operating costs. Which of the following
items, all related to the transaction, would not be considered in the
decision?
A. Purchase price of the new vehicle.
B. Purchase price of the old vehicle.
C. Savings in operating costs as a result of the
new vehicle.
D. Proceeds from disposal of the old vehicle.
E. Future depreciation on the new vehicle.
Answer:
B LO: 4 Type: N
14. Elegant, Inc., has $125,000 of inventory that
suffered minor smoke damage from a fire in the warehouse. The company can sell the goods "as
is" for $45,000; alternatively, the goods can be cleaned and shipped to
the firm's outlet center at a cost of $23,000. There the goods could be sold for $80,000. What alternative is more desirable and what is
the relevant cost for that alternative?
A. Sell "as is," $125,000.
B. Clean and ship to outlet center, $23,000.
C. Clean and ship to outlet center, $103,000.
D. Clean and ship to outlet center, $148,000.
E. Neither alternative is desirable, as both
produce a loss for the firm.
Answer:
B LO: 4 Type: A, N
15.
In early July,
Mike Gottfried purchased a $70 ticket to the December 15 game of the Chicago
Titans. (The Titans belong to the
Midwest Football League and play their games outdoors on the shore of Lake
Michigan.) Parking for the game was
expected to cost approximately $22, and Gottfried would probably spend another
$15 for a souvenir program and food. It
is now December 14. The Titans were
having a miserable season and the temperature was expected to peak at 5 degrees
on game day. Mike therefore decided to
skip the game and took his wife to the movies, with tickets and dinner costing
$50. The sunk cost associated with this
decision situation is:
A. $20.
B. $50.
C. $70.
D. $107.
E. some other amount.
Answer:
C LO: 4 Type: A
16.
In early July,
Jim Lopez purchased a $70 ticket to the December 15 game of the Chicago
Titans. (The Titans belong to the
Midwest Football League and play their games outdoors on the shore of Lake
Michigan.) Parking for the game was
expected to cost approximately $22, and Lopez would probably spend another $15
for a souvenir program and food. It is
now December 14. The Titans were having
a miserable season and the temperature was expected to peak at 5 degrees on
game day. Jim therefore decided to skip
the game and took his wife to the movies, with tickets and dinner costing
$50. The amount of sunk cost that should
influence Jim’s decision to take his wife to the movies and dinner is:
A.
$0.
B.
$20.
C.
$50.
D.
$70.
E.
some other
amount.
Answer: A LO:
4 Type: A, N
17. An opportunity cost may be described as:
A. a forgone benefit.
B. an historical cost.
C. a specialized type of variable cost.
D. a specialized type of fixed cost.
E. a specialized type of semivariable cost.
Answer:
A LO: 4 Type: RC
18. The term "opportunity cost" is best
defined as:
A. the amount of money paid for an item.
B. the amount of money paid for an item, taking
inflation into account.
C. the amount of money paid for an item, taking
possible discounts into account.
D. the benefit associated with a rejected alternative
when making a choice.
E. an irrelevant decision factor.
Answer:
D LO: 4 Type: RC
19. A factory that makes a part has significant
idle capacity. The factory's opportunity
cost of making this part is equal to:
A. the variable manufacturing cost per unit.
B. the fixed manufacturing cost per unit.
C. the semivariable cost per unit.
D. the total manufacturing cost per unit.
E. zero.
Answer:
E LO: 4 Type: N
20. Susan is contemplating a job offer with an
advertising agency where she will make $54,000 in her first year of employment.
Alternatively, Susan can begin to work
in her father's business where she will earn an annual salary of $38,000. If Susan decides to work with her father, the
opportunity cost would be:
A. $0.
B. $38,000.
C. $54,000.
D. $92,000.
E. irrelevant in deciding which job offer to
accept.
Answer:
C LO: 4 Type: A
21. Which of the following costs should be used
when choosing between two decision alternatives?
|
|
Relevant
Cost
|
|
Sunk
Cost
|
|
Opportunity
Cost
|
|
A.
|
No
|
|
Yes
|
|
No
|
|
B.
|
No
|
|
Yes
|
|
Yes
|
|
C.
|
Yes
|
|
No
|
|
No
|
|
D.
|
Yes
|
|
No
|
|
Yes
|
|
E.
|
Yes
|
|
Yes
|
|
Yes
|
Answer:
D LO: 4 Type: RC
22. Triumph, Inc., is studying whether to expand
operations by adding a new product line.
Which of the following choices correctly denotes the costs that should
be considered in this decision?
|
|
Opportunity Cost
|
|
Sunk Cost
|
|
|
A.
|
|
Yes
|
Yes
|
|
|
B.
|
|
Yes
|
Sometimes
|
|
|
C.
|
|
Yes
|
No
|
|
|
D.
|
|
No
|
Yes
|
|
|
E.
|
|
No
|
No
|
|
Answer:
C LO: 4 Type: RC
23. A special order generally should be accepted
if:
A. its revenue exceeds allocated fixed costs,
regardless of the variable costs associated with the order.
B. excess capacity exists and the revenue
exceeds all variable costs associated with the order.
C. excess capacity exists and the revenue
exceeds allocated fixed costs.
D. the revenue exceeds total costs, regardless
of available capacity.
E. the revenue exceeds variable costs,
regardless of available capacity.
Answer:
B LO: 5 Type: RC
24. Two months ago, Victory purchased 4,500
pounds of Hydrol, paying $15,300. The
market for this product has been very strong since the acquisition, with the
market price jumping to $4.05 per pound. (Victory can buy or sell Hydrol at this
price.) The company recently received a special-order
inquiry, one that would require the use of 4,200 pounds of Hydrol. Which of the following is (are) relevant in
deciding whether to accept the special order?
A. The 300-pound remaining inventory of Hydrol.
B. The $4.05 market price.
C. The $3.40 purchase price.
D. 4,500 pounds of Hydrol.
E. More than one of the above factors are
relevant.
Answer:
B LO: 5 Type: A, N
25. Flower Company, which is operating at
capacity, desires to add a new service to its rapidly expanding business. The service should be added as long as service
revenues exceed:
A. variable costs.
B. fixed costs.
C. the sum of variable costs and fixed costs.
D. the sum of variable costs and any related
opportunity costs.
E. the sum of variable costs, fixed costs, and
any related opportunity costs.
Answer:
D LO: 5 Type: N
26. Baxter has been approached about providing a
new service to its clients. The company
will bill clients $120 per hour; the related hourly variable and fixed
operating costs will be $65 and $15, respectively. If all employees are currently working at
full capacity on other client matters, the per-hour opportunity cost of being
unable to provide this new service is:
A. $0.
B. $40.
C. $55.
D. $80.
E. $120.
Answer:
C LO: 4, 5 Type: A
27. Snider, Inc., which has excess capacity,
received a special order for 4,000 units at a price of $15 per unit. Currently, production and sales are budgeted
for 10,000 units without considering the special order. Budget information for the current year
follows.
|
Sales
|
$190,000
|
|
Less: Cost of
goods sold
|
145,000
|
|
Gross margin
|
$ 45,000
|
Cost
of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted, the
company's income will:
A. increase by $2,000.
B. decrease by $2,000.
C. increase by $14,000.
D. decrease by $14,000.
E. change by some other amount.
Answer: C LO: 5
Type: A
28. Sound, Inc., reported the following results
from the sale of 24,000 units of IT-54:
|
Sales
|
$528,000
|
|
Variable
manufacturing costs
|
288,000
|
|
Fixed
manufacturing costs
|
120,000
|
|
Variable
selling costs
|
52,800
|
|
Fixed
administrative costs
|
35,200
|
Rhythm
Company has offered to purchase 3,000 IT-54s at $16 each. Sound has available capacity, and the
president is in favor of accepting the order. She feels it would be profitable because no
variable selling costs will be incurred. The plant manager is opposed because the
"full cost" of production is $17. Which of the following correctly notes the
change in income if the special order is accepted?
A. $3,000 decrease.
B. $3,000 increase.
C. $12,000 decrease.
D. $12,000 increase.
E. None of the above.
Answer:
D LO: 5 Type: A
29. CompTronics, a manufacturer of computer
peripherals, has excess capacity. The
company's Utah plant has the following per-unit cost structure for item no. 89:
|
Variable manufacturing
|
$40
|
|
Fixed manufacturing
|
15
|
|
Variable selling
|
8
|
|
Fixed selling
|
11
|
|
Traceable fixed
administrative
|
4
|
|
Allocated administrative
|
2
|
The
traceable fixed administrative cost was incurred at the Utah plant; in
contrast, the allocated administrative cost represents a "fair share"
of CompTronics' corporate overhead. Utah
has been presented with a special order of 5,000 units of item no. 89 on which
no selling cost will be incurred. The
proper relevant cost in deciding whether to accept this special order would be:
A. $40.
B. $59.
C. $61.
D. $80.
E. some other amount.
Answer:
A LO: 5 Type: A
30. The term "outsourcing" is most
closely associated with:
A. special-order decisions.
B. make-or-buy decisions.
C. equipment replacement decisions.
D. decisions to process joint products beyond
the split-off point.
E. decisions that involve limited resources.
Answer:
B LO: 5 Type: RC
31. Torrey Pines is studying whether to outsource
its Human Resources (H/R) activities.
Salaried professionals who earn $390,000 would be terminated; in
contrast, administrative assistants who earn $120,000 would be transferred
elsewhere in the organization.
Miscellaneous departmental overhead (e.g., supplies, copy charges, overnight
delivery) is expected to decrease by $30,000, and $25,000 of corporate
overhead, previously allocated to Human Resources, would be picked up by other
departments. If Torrey Pines can secure
needed H/R services locally for $410,000, how much would the company benefit by
outsourcing?
A. $10,000.
B. $35,000.
C. $130,000.
D. $155,000.
E. Nothing, as it would be cheaper to keep the department
open.
Answer:
A LO: 5 Type: A
32. Donnelly, a division of Dakota Enterprises,
currently makes 100,000 units of a product that has created a number of
manufacturing problems. Donnelly's costs
follow.
|
Manufacturing costs:
|
|
|
Variable
|
$420,000
|
|
Fixed
|
150,000
|
|
Allocated corporate
administrative cost
|
70,000
|
If
Donnelly were to discontinue production, fixed manufacturing costs would be
reduced by 80%. The relevant cost of
deciding whether the division should purchase the product from an outside
supplier is:
A. $420,000.
B. $490,000.
C. $540,000.
D. $570,000.
E. $640,000.
Answer:
C LO: 5 Type: A
33. Maddox, a division of Stanley Enterprises,
currently performs computer services for various departments of the firm. One of the services has created a number of
operating problems, and management is exploring whether to outsource the
service to a consultant. Traceable
variable and fixed operating costs total $80,000 and $25,000, respectively, in
addition to $18,000 of corporate administrative overhead allocated from
Stanley. If Maddox were to use the
outside consultant, fixed operating costs would be reduced by 70%. The irrelevant costs in Maddox's outsourcing
decision total:
A. $17,500.
B. $18,000.
C. $25,000.
D. $25,500.
E. some other amount.
Answer:
D LO: 5 Type: A
34. Which of the following statements regarding
costs and decision making is correct?
A. Fixed costs must be considered only on a
per-unit basis.
B. Per-unit fixed cost amounts are valid only
for make-or-buy decisions.
C. Per-unit fixed costs can be misleading
because such amounts appear to behave as variable costs when, in actuality, the
amounts are related to fixed expenditures.
D. Sunk costs can be misleading in make-or-buy
decisions because these amounts appear to be relevant differential costs.
E. Opportunity costs should be ignored when
evaluating decision alternatives.
Answer:
C LO: 5 Type: RC
35. An architecture firm currently offers
services that appeal to both individuals and commercial clients. If the firm decides to discontinue services to
individuals because of ongoing losses, which of the following costs could the
company likely avoid?
A. Allocated corporate overhead.
B. Building depreciation.
C. Insurance.
D. Variable operating costs.
E. Monthly installment payments on
general-purpose, computer drafting equipment.
Answer:
D LO: 5 Type: N
36. Occidental is contemplating dropping a
product because of ongoing losses. Costs
that would be relevant in this situation would include variable manufacturing
costs as well as:
A. factory depreciation.
B. avoidable fixed costs.
C. unavoidable fixed costs.
D. allocated corporate administrative costs.
E. general corporate advertising.
Answer:
B LO: 5 Type: RC
37. Coastal Airlines has a significant presence
at the San Jose International Airport and therefore operates the Emerald Club,
which is across from gate 36 in terminal 1.
The Emerald Club provides food and business services (e.g., data ports)
for the company's frequent flyers.
Consider the following selected costs of Club operation:
1. Receptionist
and supervisory salaries
2. Catering
3. Terminal depreciation (based on square
footage)
4. Airport fees (computed as a percentage of
club revenue)
5. Allocated Coastal administrative overhead
Management
is exploring whether to close the club and expand the seating area for gate
36. Which of the preceding expenses
would the airline classify as unavoidable?
A. 3.
B. 4.
C. 5.
D. 3, 5.
E. The correct answer is not listed.
Answer:
D LO: 5 Type: N
38. The Shoe Department at the Baton Rouge
Department Store is being considered for closure. The following information relates to shoe
activity:
|
Sales revenue
|
$350,000
|
|
Variable costs:
|
|
|
Cost
of goods sold
|
280,000
|
|
Sales
commissions
|
30,000
|
|
Fixed operating costs
|
90,000
|
If
70% of the fixed operating costs are avoidable, should the Shoe Department be
closed?
A. Yes, Baton Rouge would be better off by
$23,000.
B. Yes, Baton Rouge would be better off by
$50,000.
C. No, Baton Rouge would be worse off by
$13,000.
D. No, Baton Rouge would be worse off by
$40,000.
E. None of the above.
Answer:
A LO: 5 Type: A
39. Somerset Corporation is composed of five
divisions, and each division is allocated a share of Somerset overhead to make
divisional managers aware of the cost of running the corporate
headquarters. The following information
relates to the Metro Division:
|
Sales
|
$7,500,000
|
|
Variable operating costs
|
5,100,000
|
|
Traceable fixed operating
costs
|
1,900,000
|
|
Allocated corporate
overhead
|
300,000
|
If
the Metro Division is closed, 100% of the traceable fixed operating costs can
be eliminated. What will be the impact
on Somerset's overall profitability if the Metro Division is closed?
A. Decrease by $200,000.
B. Decrease by $500,000.
C. Decrease by $2,100,000.
D. Decrease by $2,400,000.
E. None of the above.
Answer:
B LO: 5 Type: A
40. Ortega Interiors provides design services to
residential and commercial clients. The
residential services produce a contribution margin of $450,000 and have
traceable fixed operating costs of $480,000.
Management is studying whether to drop the residential operation. If closed, the fixed operating costs will
fall by $370,000 and Ortega's net income will:
A. increase by $30,000.
B. increase by $80,000.
C. increase by $340,000.
D. decrease by $80,000.
E. decrease by $340,000.
Answer:
D LO: 5 Type: A
Use the
following to answer questions 41-42:
HiTech
manufactures two products: Regular and Super. The results of operations for 20x1 follow.
|
|
Regular
|
Super
|
Total
|
|||||
|
Units
|
10,000
|
|
3,700
|
|
13,700
|
|||
|
Sales
|
$240,000
|
|
$740,000
|
|
$980,000
|
|||
|
Less: Cost of
goods sold
|
180,000
|
|
481,000
|
|
661,000
|
|||
|
Gross margin
|
$ 60,000
|
|
$259,000
|
|
$319,000
|
|||
|
Less: Selling
expenses
|
60,000
|
|
134,000
|
|
194,000
|
|||
|
Operating
income
|
$ 0
|
|
$125,000
|
|
$125,000
|
|||
Fixed
manufacturing costs included in cost of goods sold amount to $3 per unit for Regular
and $20 per unit for Super. Variable
selling expenses are $4 per unit for Regular and $20 per unit for Super;
remaining selling amounts are fixed.
41. HiTech wants to drop the Regular product
line. If the line is dropped, company-wide
fixed manufacturing costs would fall by 10% because there is no alternative use
of the facilities. What would be the
impact on operating income if Regular is discontinued?
A. $0.
B. $10,400 increase.
C. $20,000 increase.
D. $39,600 decrease.
E. None of the above.
Answer:
D LO: 5 Type: A
42. Disregard the information in the previous
question. If HiTech eliminates Regular
and uses the available capacity to produce and sell an additional 1,500 units
of Super, what would be the impact on operating income?
A. $28,000 increase
B. $45,000 increase
C. $55,000 increase
D. $85,000 increase
E. None of the above.
Answer:
C LO: 5 Type: A
43. When deciding whether to sell a product at
the split-off point or process it further, joint costs are not usually
relevant because:
A. such amounts do not help to increase sales
revenue.
B. such amounts only slightly increase a
company's sales margin.
C. such amounts are sunk and do not change with
the decision.
D. the sales revenue does not decrease to the
extent that it should, if compared with separable processing.
E. such amounts reflect opportunity costs.
Answer:
C LO: 6 Type: RC
44. Product costs incurred after the split-off
point in a joint processing environment are termed:
A. separable processing costs.
B. joint product costs.
C. non-relevant costs.
D. scrap costs.
E. spoilage costs.
Answer:
A LO: 6 Type: RC
45. Foster Company is considering whether to sell
Retox at the split-off point or subject it to further processing and produce a
more refined product known as Retox-F. Consider
the following items:
I.
The
selling price of Retox-F
II.
The
joint processing cost of Retox.
III.
The
separable cost of producing Retox-F.
Which
of the above items is (are) relevant to Foster's decision to process Retox into
Retox-F?
A. I only.
B. II only.
C. III only.
D. I and II.
E. I and III.
Answer:
E LO: 6 Type: RC
46. Lido manufactures A and B from a joint
process (cost = $80,000). Five thousand
pounds of A can be sold at split-off for $20 per pound or processed further at
an additional cost of $20,000 and then sold for $25. Ten thousand pounds of B can be sold at
split-off for $15 per pound or processed further at an additional cost of
$20,000 and later sold for $16. If Lido
decides to process B beyond the split-off point, operating income will:
A. increase by $10,000.
B. increase by $20,000.
C. decrease by $10,000.
D. decrease by $20,000.
E. decrease by $58,000.
Answer: C LO: 6
Type: A
47. India Corporation has $200,000 of joint
processing costs and is studying whether to process J and K beyond the
split-off point. Information about J and
K follows.
|
|
Product J
|
Product K
|
|||
|
Tons produced
|
25,000
|
|
15,000
|
||
|
Separable
variable processing costs beyond split-off
|
$64,000
|
|
$100,000
|
||
|
Selling price per ton at
split-off
|
15
|
|
52
|
||
|
Selling price per ton after
additional processing
|
21
|
|
58
|
||
If
India desires to maximize total company income, what should the firm do with
regard to Products J and K?
|
|
Product J
|
Product K
|
|
A.
|
Sell at
split-off
|
Sell at
split-off
|
|
B.
|
Sell at
split-off
|
Process
beyond split-off
|
|
C.
|
Process
beyond split-off
|
Sell at
split-off
|
|
D.
|
Process
beyond split-off
|
Process
beyond split-off
|
|
E.
|
There is not
enough information to judge.
|
|
Answer:
C LO: 6 Type: A
48. A company that is operating at full capacity
should emphasize those products and services that have the:
A. lowest total per-unit costs.
B. highest contribution margin per unit.
C. highest contribution margin per unit of
scarce resource.
D. highest operating income.
E. highest sales volume.
Answer:
C LO: 6 Type: RC
49. A firm that decides to emphasize those goods
with the highest contribution margin per unit may have made an incorrect
decision when the company:
A. is highly automated.
B. has excess capacity.
C. has capacity constraints in the form of
limited resources.
D. has a high fixed-cost structure.
E. has a high level of sunk costs.
Answer:
C LO: 6 Type: N
50. Wright Enterprises, which produces various
goods, has limited processing hours at its manufacturing plant. The following data apply to product no. 607:
Sales
price per unit: $9.60
Variable
cost per unit: $6.20
Process
time per unit: 4 hours
Management
is now studying whether to devote the firm's limited hours to product no. 607
or to other products. What key dollar
amount should management focus on when determining no. 607's "value"
to the firm and deciding the best course of action to follow?
A. $0.85.
B. $2.40.
C. $3.40.
D. $6.20.
E. $9.60.
Answer:
A LO: 6 Type: A, N
51. Smith Manufacturing has 27,000 labor hours
available for producing X and Y.
Consider the following information:
|
|
Product X
|
|
Product Y
|
|
Required labor time per
unit (hours)
|
2
|
|
3
|
|
Maximum demand (units)
|
6,000
|
|
8,000
|
|
Contribution margin per
unit
|
$5.00
|
|
$6.00
|
|
Contribution margin per
labor hour
|
$2.50
|
|
$2.00
|
If
Smith follows proper managerial accounting practices, which of the following
production schedules should the company set?
|
|
Product X
|
|
Product Y
|
|
A.
|
0 units
|
|
8,000 units
|
|
B.
|
1,500 units
|
|
8,000 units
|
|
C.
|
6,000 units
|
|
0 units
|
|
D.
|
6,000 units
|
|
5,000 units
|
|
E.
|
6,000 units
|
|
8,000 units
|
Answer:
D LO: 6 Type: A
52. Bush Manufacturing has 31,000 labor hours
available for producing M and N.
Consider the following information:
|
|
Product M
|
|
Product N
|
|
Required labor time per
unit (hours)
|
2
|
|
3
|
|
Maximum demand (units)
|
6,500
|
|
8,000
|
|
Contribution margin per
unit
|
$5.00
|
|
$5.70
|
|
Contribution margin per
labor hour
|
$2.50
|
|
$1.90
|
If
Bush follows proper managerial accounting practices in terms of setting a
production schedule, how much contribution margin would the company expect to
generate?
A. $31,450.
B. $63,100.
C. $66,700.
D. $78,100.
E. None of the above.
Answer:
C LO: 6 Type: A
Use the
following to answer questions 53-54:
Johnson Company
makes two products: Carpet Kleen and Floor Deodorizer. Operating information
from the previous year follows.
|
|
Carpet Kleen
|
|
Floor Deodorizer
|
|
Units
produced and sold
|
5,000
|
|
4,000
|
|
Machine hours
used
|
5,000
|
|
2,000
|
|
Sales price
per unit
|
$7
|
|
$10
|
|
Variable cost
per unit
|
$4
|
|
$8
|
Fixed costs of
$20,000 per year are presently allocated equally between both products. If the product mix were to change, total fixed
costs would remain the same.
53. The contribution margin per machine hour for
Floor Deodorizer is:
A. $0.25.
B. $2.00.
C. $4.00.
D. $5.00.
E. $20.00.
Answer:
C LO: 6 Type: A
54. Assuming there is unlimited demand for both
products and Johnson has 10,000 machine hours available, how many units of each
product should be produced and sold?
|
|
Carpet Kleen
|
|
Floor
Deodorizer
|
|
A.
|
0 units
|
|
0 units
|
|
B.
|
0 units
|
|
20,000
units
|
|
C.
|
5,000
units
|
|
10,000
units
|
|
D.
|
8,000
units
|
|
4,000
units
|
|
E.
|
10,000
units
|
|
0 units
|
Answer:
B LO: 6 Type: A, N
55. A technique that is useful in exploring what
would happen if a key decision prediction or assumption proved wrong is termed:
A. sensitivity analysis.
B. uncertainty analysis.
C. project analysis.
D. linear programming.
E. the theory of constraints.
Answer:
A LO: 6 Type: RC
56. Which of the following characteristics would
best explain the use of probabilities and expected values in a decision analysis?
A. Limited resources.
B. Uncertainty.
C. Inflation.
D. Multiple products and services.
E. Production bottlenecks.
Answer:
B LO: 6 Type: RC
57. Consider the following statements about
relevant costing and activity-based costing:
I.
The
concept of relevant costs and benefits cannot be used in conjunction
with an activity-based costing system.
II.
The
concept of relevant costs and benefits must be modified for use with an
activity-based costing system.
III.
Generally
speaking, the decision maker can better associate relevant costs with the
activities that drive them under an activity-based costing system than under a
conventional product-costing system.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.
Answer:
C LO: 7 Type: RC
58. Linear programming would be used by decision
makers when there are:
A. limited resources for labor.
B. scarce resources for machine hours.
C. scarce resources for both labor and machine
hours.
D. multiple scarce resources.
E. limited resources for material.
Answer:
D LO: 8 Type: RC
59. A constraint function in a linear-programming
problem might focus on:
A. sales dollars.
B. labor hours.
C. variable costs.
D. fixed costs.
E. qualitative factors.
Answer:
B LO: 8 Type: N
60. When using a graphical solution to a linear
programming problem, the optimal solution will lie in an area commonly known as
the:
A. region of maximization.
B. feasible region.
C. objective region.
D. constraint region.
E. curvilinear region.
Answer:
B LO: 8 Type: RC
Use the
following to answer questions 61-62:
Prudential
Corporation manufactures two products: X and Y. The company has 4,000 hours of machine time
available and can sell no more than 800 units of product X. Other pertinent data follow.
|
|
Product X
|
Product Y
|
|
Selling price
|
$8.00
|
$19.00
|
|
Variable cost
|
3.00
|
5.00
|
|
Fixed cost
|
3.50
|
6.25
|
|
Machine time
per unit
|
2 hours
|
3 hours
|
61. Which of the following is Prudential's
objective function?
A. Maximize Z = 2X + 3Y.
B. Maximize Z = 8X + 19Y.
C. Maximize Z = 5X + 14Y.
D. Maximize Z = 1.50X + 7.75Y.
E. Minimize Z = 6.50X + 11.25Y.
Answer:
C LO: 8 Type: A
62. Which of the following is a constraint
function of Prudential?
A. Maximize Z = 5X + 14Y.
B. Minimize Z = 6.50X + 11.25Y.
C. X ³ 800.
D. 2X £ 4,000; 3Y £ 4,000.
E. 2X + 3Y £ 4,000.
Answer:
E LO: 8 Type: A
EXERCISES
Relevant
Decision Factors
63. The following costs relate to a variety of
decision settings:
|
|
Cost
|
Decision
|
|
1.
|
Allocated corporate overhead
|
Closing a
money-losing department
|
|
2.
|
Cost of an old car
|
Vehicle
replacement
|
|
3.
|
Direct materials
|
Make or buy a
product
|
|
4.
|
Salary of marketing manager
|
Project discontinuance; manager to be transferred
elsewhere in the firm
|
|
5.
|
Home theater installation
|
Purchase of a
new home
|
|
6.
|
Unavoidable fixed overhead
|
Plant closure
|
|
7.
|
Research expenditures incurred last
year, related to new product
|
Product
introduction to marketplace
|
|
8.
|
$4 million advertising program
|
Whether to promote product A or B with the $4 million
program
|
|
9.
|
Manufactured cost of existing inventory
|
Whether to discard the goods or sell them to a
third-world country
|
Required:
Consider each of the nine costs listed and determine
whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain
why.
LO: 3, 4,
5 Type: N
Answer:
1.
Irrelevant—The
cost will be incurred whether the department continues to operate or is closed.
2.
Irrelevant—The
cost is sunk.
3.
Relevant
4.
Irrelevant—The
cost will be incurred whether or not the project is discontinued.
5.
Relevant,
although this is a highly optional item.
6.
Irrelevant—The
cost will be incurred whether or not the plant is closed.
7.
Irrelevant—The
cost is sunk.
8.
Irrelevant—The
cost is the same regardless of which product is selected.
9.
Irrelevant—The
cost is sunk.
Relevant Decision Factors
64. Clancy Van Lines is considering the
acquisition of two new trucks. Because
of improved mileage, these vehicles are expected to have a lower operating cost
per mile than the trucks the company plans to replace. Management is studying whether the firm would
be better-off keeping the older vehicles or going ahead with the replacement,
and has identified the following decision factors to evaluate:
1. Cost
and book value of the old trucks
2. Moving revenues,
which are not expected to change with the acquisition
3. Operating costs
of the new and old vehicles
4. New truck
purchase price and related depreciation charges
5. Proceeds from
sale of the old vehicles
6. The 8% return on
alternative investments that Clancy will forego by tying up cash in the new
trucks
7. Drivers' wages
and fringe benefits
Required:
Classify
the seven decision factors listed into the following categories (note: factors
may be used more than once):
A.
Relevant
costs.
B.
Opportunity
costs.
C.
Sunk
costs.
D.
Factors
to be considered in the decision.
LO: 3, 4,
5 Type: N
Answer:
A. 3, 4, 6
B. 6
C. 1
D. 3, 4, 5, 6
Relevant
Costs
65. Attleboro Company recently discontinued the
manufacture of product J15. The standard
costs for this product were:
|
Direct
material
|
$ 50
|
|
Direct labor
|
20
|
|
Variable
overhead
|
14
|
|
Fixed
overhead
|
35
|
|
Total
|
$119
|
There
are 800 units of this product in finished-goods inventory. The units are technologically obsolete, and
the following alternatives are being considered:
1. Dispose of as scrap. The proceeds from the sale will equal the cost
of transportation to the disposal site.
2. Sell to an exporter for sale in a
developing country. The sales price to
the exporter would be $12 per unit.
3. Remanufacture the products to convert them
into model J16, a model that normally sells for $200. The additional cost to convert the J15 units
would be $45; the standard cost to manufacture J16 is $125. Presently, there is sufficient capacity to
manufacture product J16 directly or to do the necessary conversion work on J15.
Required:
A. Determine the current carrying value of
the J15 inventory.
B. Evaluate each alternative and determine
the financial benefit to Attleboro if the alternative is pursued.
LO: 4,
5 Type: A
Answer:
|
A.
|
Ending
inventory: 800 units x $119 = $95,200
|
|||||||||
|
B.
|
1.
|
Scrap: no financial
benefit.
|
||||||||
|
|
2.
|
Sell to
exporter: 800 units x $12 = $9,600
|
||||||||
|
|
3.
|
|
Modify J15
|
|
Manufacture J16
|
|||||
|
|
|
Incremental
revenue
|
$200
|
$200
|
||||||
|
|
|
Less:
Incremental cost
|
45
|
125
|
||||||
|
|
|
Net benefit
|
$155
|
$
75
|
||||||
|
|
|
The conversion of J15
into J16 will yield a $155 benefit, more than producing J16s directly. Note that the $119 cost of existing J15s is
sunk.
|
||||||||
Relevant Costs
66.
Mystic, Inc.,
produces a variety of products that carry the logos of teams in Southern
Football League (SFL). The company
recently paid the league $85,000 for the rights to market a popular player
jersey and immediately began production.
The following information is available:
Number of
jerseys manufactured: 25,000
Cost of jerseys
manufactured: $625,000
Amount of
manufacturing costs paid to-date: $410,000
Number of
jerseys sold to-date: 0
Estimated
future marketing costs: $330,000
Anticipated
selling price per jersey: $42
The SFL is about to file a lawsuit to stop jersey
sales and is demanding another $50,000 from Mystic for the manufacturing rights. Conversations with Mystic's attorneys
indicate that the league has a strong case and is likely to win the suit. If this situation arises, Mystic will be
unable to recover any amounts paid to the SFL.
Required:
Mystic's sales department anticipates very strong
demand and a sellout of all jerseys manufactured.
A.
Determine the
overall profitability of the jersey product line if Mystic settles the
disagreement with the SFL and the anticipated sellout occurs.
B.
Should the
company pay the additional $50,000 demanded by the league or should the jersey
program be dropped? Show computations to
support your answer.
LO: 4, 5 Type:
A
Answer:
A.
The jerseys
produce a $40,000 loss for the company: Sales revenues (25,000 x $42 =
$1,050,000) - manufacturing costs ($625,000) - rights ($85,000 + $50,000) -
promotion costs ($330,000).
B. Mystic
should pay the $50,000 demanded by the league given that sunk costs in this
situation total $710,000 ($85,000 + $625,000).
(Although only $410,000 of this latter amount has been paid to-date, the
company is liable for 100% of the manufacturing cost incurred.) Thus, for a $50,000 payment, Mystic will
generate $1,050,000 in revenue and incur current/future costs of $380,000
($330,000 + $50,000), for a net benefit of $670,000. This net benefit will contribute toward
covering the previously incurred sunk costs of $710,000.
Special
(Custom) Order
67. Howard Robinson builds custom homes in
Cincinnati. Robinson was approached not
too long ago by a client about a potential project, and he submitted a bid of
$483,800, derived as follows:
|
Land
|
$ 80,000
|
|
Construction
materials
|
100,000
|
|
Subcontractor
labor costs
|
120,000
|
|
|
$300,000
|
|
Construction
overhead: 25% of direct costs
|
75,000
|
|
Allocated
corporate overhead
|
35,000
|
|
Total cost
|
$410,000
|
Robinson adds an 18% profit margin
to all jobs, computed on the basis of total cost. In this client's case the profit margin
amounted to $73,800 ($410,000 x 18%), producing a bid price of $483,800. Assume that 70% of construction overhead is
fixed.
Required:
A.
Suppose
that business is presently very slow, and the client countered with an offer on
this home of $390,000. Should Robinson
accept the client's offer? Why?
B.
If
Robinson has more business than he can handle, how much should he be willing to
accept for the home? Why?
LO: 4,
5 Type: A, N
Answer:
A.
A
relevant cost analysis shows that the home is still profitable at $390,000, and
the offer should be accepted. Keep in
mind that business is very slow.
|
Land
|
$ 80,000
|
|
Construction
materials
|
100,000
|
|
Subcontractor
labor costs
|
120,000
|
|
Variable
construction overhead: $75,000 x 30%
|
22,500
|
|
Total
relevant costs
|
$322,500
|
B.
Since
demand is very strong, Robinson should hold firm to the $483,800 price. This way he can cover all of his costs and
make his normal 18% profit margin.
Special Order,
Outsourcing
68. Cornell Corporation manufactures
faucets. Several weeks ago, the firm
received a special-order inquiry from Yale, Inc. Yale desires to market a faucet similar to
Cornell's model no. 55 and has offered to purchase 3,000 units. The following data are available:
·
Cost
data for Cornell's model no. 55 faucet: direct materials, $45; direct labor,
$30 (2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35
per hour).
·
The
normal selling price of model no. 55 is $180; however, Yale has offered Cornell
only $115 because of the large quantity it is willing to purchase.
·
Yale
requires a design modification that will allow a $4 reduction in direct-material
cost.
·
Cornell's
production supervisor notes that the company will incur $8,700 in additional
set-up costs and will have to purchase a $3,300 special device to manufacture
these units. The device will be
discarded once the special order is completed.
·
Total
manufacturing overhead costs are applied to production at the rate of $35 per
labor hour. This figure is based, in
part, on budgeted yearly fixed overhead of $624,000 and planned production
activity of 24,000 labor hours.
·
Cornell
will allocate $5,000 of existing fixed administrative costs to the order as
"…part of the cost of doing business."
Required:
A.
One
of Cornell's staff accountants wants to reject the special order because
"financially, it's a loser."
Do you agree with this conclusion if Cornell currently has excess
capacity? Show calculations to support
your answer.
B.
If
Cornell currently has no excess capacity, should the order be rejected from a
financial perspective? Briefly explain.
C.
Assume
that Cornell currently has no excess capacity.
Would outsourcing be an option that Cornell could consider if management
truly wanted to do business with Yale?
Briefly discuss, citing several key considerations for Cornell in your
answer.
LO: 4,
5 Type: A, N
Answer:
A.
No,
the conclusion is incorrect because the order generates a net contribution of
$66,000 for the firm. Note: The fixed
administrative cost is irrelevant to the decision.
Selling
price
|
|
$115
|
|||
|
Less: Direct materials ($45 - $4)
|
$41
|
|
|||
|
Direct
labor
|
30
|
|
|||
|
Variable manufacturing overhead (2
hours x $9*)
|
18
|
89
|
|||
|
Unit contribution margin
|
|
$ 26
|
|||
|
|
|
|
|||
|
Total contribution margin (3,000 units x $26)
|
|
$78,000
|
|||
|
Less: Additional set-up costs
|
$8,700
|
|
|||
|
Special device
|
3,300
|
12,000
|
|||
|
Net contribution to profit
|
|
$66,000
|
|||
|
|
|
|
|||
|
*Fixed
manufacturing overhead: $624,000 ÷ 24,000 labor hours = $26 per hour
Variable manufacturing overhead: $35 - $26
= $9
|
|||||
B.
Yes,
the order should be rejected. An
environment of no excess capacity implies a very strong marketplace. Cornell would be giving up sales at $180
per faucet, to be replaced with sales of $115 per unit and the need to incur
additional set-up costs and the cost of a special device. Company profitability would suffer.
C.
Yes,
outsourcing is an option. Cornell could
have another manufacturer produce the faucets for Yale or perhaps even for
another customer. Price, product
quality, and supplier reliability would be important considerations in this
decision.
Outsourcing
69. St. Joseph Hospital has been hit with a
number of complaints about its food service from patients, employees, and
cafeteria customers. These complaints,
coupled with a very tight local labor market, have prompted the organization to
contact Nationwide Institutional Food Service (NIFS) about the possibility of
an outsourcing arrangement.
The
hospital's business office has provided the following information for food
service for the year just ended: food costs, $890,000; labor, $85,000; variable
overhead, $35,000; allocated fixed overhead, $60,000; and cafeteria food sales,
$80,000.
Conversations
with NIFS personnel revealed the following information:
·
NIFS
will charge St. Joseph Hospital $14 per day for each patient served. Note: This figure has been "marked
up" by NIFS to reflect the firm's cost of operating the hospital
cafeteria.
·
St.
Joseph's 250-bed facility operates throughout the year and typically has an
average occupancy rate of 70%.
·
Labor
is the primary driver for variable overhead.
If an outsourcing agreement is reached, hospital labor costs will drop
by 90%. NIFS plans to use St. Joseph
facilities for meal preparation.
·
Cafeteria
food sales are expected to increase by 15% because NIFS will offer an improved
menu selection.
Required:
A.
What
is meant by the term "outsourcing"?
B.
Should
St. Joseph outsource its food-service operation to NIFS?
C.
What
factors, other than dollars, should St. Joseph consider before making the final
decision?
LO: 4,
5 Type: A, N
Answer:
A.
Outsourcing
is essentially a make-or-buy decision, that is, producing a product or service
in-house or purchasing it from an external supplier.
B.
The
hospital would be better off to outsource its food-service operation,
benefiting by $115,750 ($930,000 - $814,250).
Note: The allocated overhead is not a relevant decision factor.
|
|
St. Joseph
|
NIFS
|
|
Food cost
|
$890,000
|
$ ---
|
|
Labor
($85,000; $85,000 x 10%)
|
85,000
|
8,500
|
|
Variable
overhead ($35,000; $35,000 x 10%)
|
35,000
|
3,500
|
|
Cafeteria
food sales ($80,000; $80,000 x 115%)
|
(80,000)
|
(92,000)
|
|
NIFS
charges (250 beds x 70% x 365 days x $14)
|
---
|
894,250
|
|
Net cost
|
$930,000
|
$814,250
|
C.
Factors
to consider would include improvement in food quality, reliability of NIFS,
elimination of labor problems, and data validity in future years.
Store Closure
70. Papa Fred's Pizza store no. 16 has fallen on
hard times and is about to be closed. The
following figures are available for the period just ended:
|
Sales
|
$205,000
|
|
Cost of sales
|
67,900
|
|
Building
occupancy costs:
|
|
|
Rent
|
36,500
|
|
Utilities
|
15,000
|
|
Supplies used
|
5,600
|
|
Wages
|
77,700
|
|
Miscellaneous
|
2,400
|
|
Allocated
corporate overhead
|
16,800
|
All
employees except the store manager would be discharged. The manager, who earns $27,000 annually, would
be transferred to store no. 19 in a neighboring suburb. Also, no. 16's furnishings and equipment are
fully depreciated and would be removed and transported to Papa Fred's warehouse
at a cost of $2,800.
Required:
A.
What
is store no. 16's reported loss for the period just ended?
B.
Should
the store be closed? Why?
C.
Would
Papa Fred's likely lose all $205,000 of sales revenue if store no. 16 were
closed? Explain.
LO: 4,
5 Type: A, N
Answer:
|
A.
|
Sales
|
|
$205,000
|
|
|
|
Less:
|
|
|
|
|
|
Cost of
sales
|
$67,900
|
|
|
|
|
Rent
|
36,500
|
|
|
|
|
Utilities
|
15,000
|
|
|
|
|
Supplies
used
|
5,600
|
|
|
|
|
Wages
|
77,700
|
|
|
|
|
Miscellaneous
|
2,400
|
|
|
|
|
Allocated
corporate overhead
|
16,800
|
221,900
|
|
|
|
Operating
income (loss)
|
|
$ (16,900)
|
|
|
B.
|
No, the store
should continue in operation. Two of
the costs included in the preceding total are not relevant for the
decision. Papa Fred's will continue to
incur the costs of the store manager ($27,000) and allocated corporate
overhead ($16,800) regardless of the decision, resulting in "relevant
operating income" of $26,900 [$205,000 – ($221,900 - $27,000 - $16,800)]
if store no. 16 remains open.
Additionally, Papa Fred's would avoid the $2,800 cost associated with
equipment removal.
|
|||
|
C.
|
Probably
not. If the store is closed, loyal
customers may go to another location.
The firm will lose some sales, but the likelihood of losing the entire
$205,000 revenue pool is low.
|
|||
Evaluation of a Service
Line
71. "It's close to a $40,000 loser and we
ought to devote our efforts elsewhere," noted Kara Whitmore, after
reviewing financial reports of her company's attempt to offer a reduced-price
daycare service to employees. The
daycare's financial figures for the year just ended follow.
|
Revenues
|
$120,000
|
|
Variable costs
|
45,000
|
|
Traceable fixed costs
|
89,000
|
|
Allocated corporate
overhead
|
24,000
|
If
the daycare service/center is closed, 70% of the traceable fixed cost will be
avoided. In addition, the company will
incur one-time closure costs of $6,800.
Required:
A.
Show
calculations that support Kara Whitmore's belief that the daycare center lost
almost $40,000.
B.
Should
the center be closed? Show calculations
to support your answer.
C.
What
problem might the company experience if the center is closed?
LO: 4,
5 Type: A, N
Answer:
|
A.
|
Revenues
|
|
|
$120,000
|
||
|
|
Less: Variable costs
|
$45,000
|
|
|
||
|
|
Traceable
fixed costs
|
89,000
|
|
|
||
|
|
Allocated
corporate overhead
|
24,000
|
|
158,000
|
||
|
|
Operating income (loss)
|
|
|
$(38,000)
|
||
|
B.
|
The company would be
better-off to continue the daycare service, as the cost of closure exceeds the benefit of on-going
operation:
|
|||||
|
|
Contribution
margin lost ($120,000 - $45,000)
|
$(75,000)
|
||||
|
|
Savings
in traceable fixed costs ($89,000 x 70%)
|
62,300
|
||||
|
|
One-time
closure cost
|
(6,800)
|
||||
|
|
Benefit
(cost) of closure
|
$(19,500)
|
||||
|
C.
|
The center is a fringe
benefit for employees. Without the service,
the company may lose some key people and have trouble attracting new
hires. Even if the center produces a
small loss, Whitmore should not be alarmed, as fringe benefits rarely have a
zero price tag.
|
|||||
Make or Buy, Capacity
Constraint
72. Fowler Industries produces two bearings: C15
and C19. Data regarding these two
bearings follow.
|
|
C15
|
C19
|
|
|
Machine hours required per unit
|
2.00
|
2.50
|
|
|
Standard cost per unit:
|
|
|
|
|
Direct material
|
$ 2.50
|
$ 4.00
|
|
|
Direct labor
|
5.00
|
4.00
|
|
|
Manufacturing overhead:
|
|
|
|
|
Variable*
|
3.00
|
2.50
|
|
|
Fixed**
|
4.00
|
5.00
|
|
|
Total
|
$14.50
|
$15.50
|
|
|
*Applied on the
basis of direct labor hours
|
|||
|
**Applied on the basis of machine hours
|
|||
The
company requires 8,000 units of C15 and 11,000 units of C19. Recently, management decided to devote
additional machine time to other product lines, resulting in only 31,000
machine hours per year that can be dedicated to production of the bearings. An outside company has offered to sell Fowler
the bearings at prices of $13.50 for C15 and $13.50 for C19.
Required:
A.
Assume
that Fowler decided to produce all C15s and purchase C19s only as needed. Determine the number of C19s to be purchased.
B.
Compute
the net benefit to the firm of manufacturing (rather than purchasing) a unit of
C15. Repeat the calculation for a unit
of C19.
C.
Fowler
lacks sufficient machine time to produce all of the C15s and C19s needed. Which
component (C15 or C19) should Fowler manufacture first with the limited machine
hours available? Why? Be sure to show all supporting computations.
LO: 5,
6 Type: A
Answer:
|
A.
|
Machine hours
available
|
31,000
|
||||
|
|
Less: Machine
hours for C15 (8,000 x 2)
|
16,000
|
||||
|
|
Machine hours
available for C19
|
15,000
|
||||
|
|
Machine hours
per unit of C19
|
÷ 2.5
|
||||
|
|
Units to be
manufactured
|
6,000
|
||||
|
|
|
|
||||
|
|
Annual requirement
|
11,000
|
||||
|
|
Less: Units
to be manufactured
|
6,000
|
||||
|
|
C19s to
purchase
|
5,000
|
||||
|
|
|
|
|
|||
|
B.
|
|
C15
|
C19
|
|||
|
|
Direct
material
|
$ 2.50
|
$ 4.00
|
|||
|
|
Direct labor
|
5.00
|
4.00
|
|||
|
|
Variable
overhead
|
3.00
|
2.50
|
|||
|
|
Total
variable cost
|
$10.50
|
$10.50
|
|||
|
|
Purchase
price quoted
|
$13.50
|
$13.50
|
|||
|
|
Less: Total
variable cost
|
10.50
|
10.50
|
|||
|
|
Net benefit
per unit of manufacturing
|
$ 3.00
|
$ 3.00
|
|||
|
C.
|
C15 consumes
2 hours of machine time, thus providing a net benefit of $1.50 per hour ($3 ÷
2). In contrast, C19 consumes 2.5
hours of time and produces a benefit of $1.20 per hour ($3 ÷ 2.5). On the basis of this information, the
company should focus on C15.
|
|||||
Use of Excess Production
Capacity
73. Lee Company has met all production
requirements for the current month and has an opportunity to manufacture
additional units with its excess capacity. Unit selling prices and unit costs for three
product lines follow.
|
|
Plain
|
Regular
|
Super
|
|||
|
Selling price
|
$40
|
|
$55
|
|
$65
|
|
|
Direct
material
|
12
|
|
16
|
|
22
|
|
|
Direct labor
(at $20 per hour)
|
10
|
|
15
|
|
20
|
|
|
Variable
overhead
|
8
|
|
12
|
|
16
|
|
|
Fixed
overhead
|
6
|
|
7
|
|
8
|
|
Variable
overhead is applied on the basis of direct labor dollars, whereas fixed
overhead is applied on the basis of machine hours. There is sufficient demand for the additional
manufacture of all products.
Required:
A.
If Lee
Company has excess machine capacity and can add more labor as needed (i.e.,
neither machine capacity nor labor is a constraint), which product is the most
attractive to produce?
B.
If Lee
Company has excess machine capacity but a limited amount of labor time
available, which product or products should be manufactured in the excess
capacity?
LO: 5,
6 Type: A
Answer:
|
A.
|
|
Plain
|
Regular
|
Super
|
|||||||||
|
|
Selling
price
|
$40
|
|
$55
|
|
$65
|
|||||||
|
|
Direct
material
|
$12
|
|
$16
|
|
$22
|
|||||||
|
|
Direct
labor
|
10
|
|
15
|
|
20
|
|||||||
|
|
Variable
overhead
|
8
|
|
12
|
|
16
|
|||||||
|
|
Total variable cost
|
$30
|
|
$43
|
|
$58
|
|||||||
|
|
Unit
contribution margin
|
$10
|
|
$12
|
|
$ 7
|
|||||||
|
|
When there is no limit on production capacity, Regular
should be manufactured because it has the highest contribution margin per
unit.
|
||||||||||||
|
B.
|
|
Plain
|
Regular
|
Super
|
|||||||||
|
|
Unit contribution margin
|
$10
|
$12
|
$7
|
|||||||||
|
|
Direct labor hours required (DL$ ÷ $20)
|
÷ 0.50
|
÷ 0.75
|
÷ 1.00
|
|||||||||
|
|
Contribution
margin per direct labor hour
|
$20
|
$16
|
$7
|
|||||||||
|
|
When
labor is in short supply, Plain should be manufactured because it has the
highest contribution margin per direct labor hour.
|
||||||||||||
Joint Costs:
Allocation and Decision Making
74. Riverside Company manufactures G and H in a
joint process. The joint costs amount to
$80,000 per batch of finished goods. Each
batch yields 20,000 liters, of which 40% are G and 60% are H. The selling price of G is $8.75 per liter, and
the selling price of H is $15.00 per liter.
Required:
A.
If
the joint costs are allocated on the basis of the products' sales value at the
split-off point, what amount of joint cost will be charged to each
product?
B.
Riverside
has discovered a new process by which G can be refined into Product GG, which
has a sales price of $12 per liter. This
additional processing would increase costs by $2.10 per liter. Assuming there are no other changes in costs,
should the company use the new process? Show
calculations.
LO: 6 Type: A
Answer:
|
A.
|
Each
batch of 20,000 liters yields 8,000 liters of G (40%) and 12,000 liters of H
(60%). Thus, the sales values at
split-off are: G, $70,000 (8,000 x $8.75) and H, $180,000 (12,000 x $15.00),
for a total of $250,000. The joint
cost allocation is:
G: ($70,000 ÷ $250,000) x $80,000 = $22,400
H: ($180,000 ÷ $250,000) x $80,000 = $57,600
|
||
|
B.
|
Incremental
revenue per liter ($12.00 - $8.75)
|
$ 3.25
|
|
|
|
Less:
Incremental costs per liter
|
2.10
|
|
|
|
Incremental
profit per liter
|
$ 1.15
|
|
|
|
Volume
in liters
|
x 8,000
|
|
|
|
Incremental
profit
|
$ 9,200
|
|
|
|
Riverside
should go ahead with the new process as it is profitable for the firm.
|
||
Joint Costs: Allocation, Focus on Decision Making
75.
Stowers
Corporation manufactures products J, K, and L in a joint process. The company incurred $480,000 of joint
processing costs during the period just ended and had the following data that
related to production:
|
|
|
Sales Values and Additional
Cost if Processed Beyond Split-off
|
|||||||
|
Product
|
Sales Value at Split-off
|
Sales Value
|
Additional Cost
|
||||||
|
J
|
$400,000
|
|
$550,000
|
|
$130,000
|
|
|||
|
K
|
350,000
|
|
540,000
|
|
240,000
|
|
|||
|
L
|
850,000
|
|
975,000
|
|
118,000
|
|
|||
An analysis revealed that all costs incurred after the
split-off point are variable and directly traceable to the individual product
line.
Required:
A.
If Stowers
allocates joint costs on the basis of the products' sales values at the split-off
point, what amount of joint cost would be allocated to product J?
B.
If production of
J totaled 50,000 gallons for the period, determine the relevant cost per gallon
that should be used in decisions that explore whether to sell at the split-off
point or process further? Briefly
explain your answer.
C.
At the beginning
of the current year, Stowers decided to process all three products beyond the
split-off point. If the company desired
to maximize income, did it err in regards to its decision with product J? Product K? Product L?
By how much?
LO: 6 Type: A,
N
Answer:
A.
The total sales
value at split-off amounts to $1,600,000 ($400,000 + $350,000 + $850,000. Since J has 25% of the sales value ($400,000
÷ $1,600,000), Stowers would allocate $120,000 of joint cost ($480,000 x 25%).
B.
Joint costs are
not relevant in making this decision because the amounts have already been
incurred and are the same regardless of what the company decides to do. The only relevant cost is cost incurred
beyond the split-off, which for J amounts to $2.60 per gallon ($130,000 ÷
50,000 gallons).
C.
As noted in part "B,"
joint cost is not relevant for sell at split vs. process further
decisions. Rather, one must explore
differential revenue vs. differential cost, as follows:
J: ($550,000 -
$400,000) vs. $130,000 = $20,000
K: ($540,000 -
$350,000) vs. $240,000 = $(50,000)
L: ($975,000 -
$850,000) vs. $118,000 = $7,000
The
company erred in processing K beyond the split point and lost $50,000 in the
process.
DISCUSSION QUESTIONS
Characteristics of
Information for Decision Making
76. Information is said to be useful in decision
making if it possesses three characteristics.
Required:
A.
List
the three characteristics of useful information.
B.
Frequently,
there is a conflict between two of the characteristics requested in part
"A." Briefly explain what this
conflict is.
C.
What
distinguishes relevant from irrelevant information?
LO: 3 Type: RC
Answer:
A.
The
three characteristics are relevance, accuracy, and timeliness.
B. Accuracy frequently can be enhanced if
more time is used to develop, obtain, or analyze information. Thus, in order to meet deadlines for
decisions, information may have to be developed that is less accurate than
desired.
C. Relevant information is pertinent to the
decision, that is, it has the potential to influence the decision. Specifically, future costs and revenues that
differ among alternatives must be considered. In contrast, irrelevant information includes
past conditions as well as future conditions that will not be affected by the
choice among alternatives.
Distinctions Between Sunk
Costs and Opportunity Costs
77. Sunk costs and opportunity costs are inherent
in decision making.
Required:
A.
Define
the terms "sunk cost" and "opportunity cost."
B.
How
are sunk costs treated when making decisions?
C.
"Information
about sunk costs can be found in the financial statements and accounting
records; however, information about opportunity costs is omitted." Do you agree with this statement? Explain.
LO: 4 Type: RC, N
Answer:
A.
A
sunk cost is a past cost that will remain the same no matter which of the
alternatives under consideration is chosen. An opportunity cost is the potential benefit
given up when the choice of one alternative requires the sacrifice of another. Opportunity cost is measured by using the net
benefit of the best alternative not taken.
B. Sunk costs should be ignored when making
decisions, as one cannot change what has happened in the past.
C. Yes. The accounting system is historical; its main
focus is on events that have occurred. Consequently,
information about sunk costs will be found in the financial statements and
accounting records. On the other hand,
opportunity costs refer to the benefits from alternatives that are not
selected. Because these alternatives
were not chosen, an historical system will not include any measures of these
costs.
Capacity Restrictions
78. Capacity restrictions often change the way
that managers make decisions. For
example, consider a retailer that has limited square footage in its store. What guideline should be used in deciding
which new products to carry? How would
this differ, say, from a concert promoter that desires to bring a rock group to
an arena-type facility?
LO: 6 Type: RC, N
Answer:
When a
single scarce resource is present, decisions should be made on the basis of the
contribution margin per unit of scarce resource. In this case, the retailer should focus on the
contribution margin per square foot. This
same principle can be used by the concert promoter, who will study the
contribution margin per seat.
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